With a last quote of 59.49 euros, market cap is 70 (million) euros. If you have a look at the balance sheet cash and short term investments 48 Me there is also long term investments 37 Me (those are actually excess cash that was invested in certificates of deposit) long term debt is around 2 Me short term debt is around 11 Me. So basically the company is valued for its net cash. As you can see in the MSN link the company is profitable (has been for 11 years, my records don't go before that, distributes a dividend, buys back some shares but not each year) 2009 PE ratio is 7. FCF is less good (mean value is ~ 8 Me for the last 6 years, but fluctuates and negative in 2005).

Only 30 % of the stock is public, the rest is owned by the current CEO and his family.

The stock has been moving sideways for a long, long time (MSN, Bloomberg). Given the sorry state of the French government finances, obviously some major public infrastructure projects will be cancelled.

So here are my questions. I wonder what's your view on this.

Is it a fantastic opportunity or a trap and why?

Regards,

Pierre

***

Pierre’s description offers some helpful information that the data you see on many finance websites misses. He says that the company has 37 million euros invested in certificates of deposit which – though more or less cash – are carried on the balance sheet under non-current assets. To a computer, a certificate of deposit (CD) shown under non-current assets is no different from the machines on a factory floor. To a human investor, it’s apples and oranges.

That’s why the best way to research a stock is to go straight to the primary documents. Straight to the annual report.

But they’re in French.

Wrong. They’re in accounting.

I’m not saying that to be funny. I mean it. The most important language in any annual report is not French or English it’s GAAP or IFRS. It’s the way the accounting works. It’s the layout of the document. It’s the language and the structure and the overall attempt at communication between the report reader and the statement preparer. Very little of this has anything to do with language in the sense of French versus English.

In fact, reading through the financial statements of this French company, the obstacles to understanding this investment come mostly from misunderstandings that aren’t caused by the divide between French and English language but between French and American customs.

For example, the biggest thing you could miss in CIFE’s latest financial report (PDF) is the 37.324 million euros in non-current cash assets. This means the company doesn’t have 106.140 million euros in current assets. It really has 143.464 million euros in current assets. That leaves 57 million euros in net current assets against a market cap of 71 million euros. That’s a price to net current asset value of less than 1.25. Which is very cheap.

Here’s what the asset side of CIFE’s balance sheet looks like:

If you’re used to reading American balance sheets, the stuff that throws you is not the French. In fact, your mind doesn’t even register some of the words are in French, because they appear exactly where you expect and say exactly what you expect. So, for example, you know what “Comptes Consolides” means in this context even if you don’t know French. You don’t have to know French to know this is a consolidated balance sheet for the period ended June 2010 and you’re looking at the asset side. None of that is French. It’s accounting. And you know it.

It gets more complicated when we reach “actif non courant” which tips you off to the fact this isn’t an American balance sheet. In all honesty, I don’t see “actif non courant” first when I read this statement. My eye immediately jumps down to “total actif non courant” expecting to see the total current assets and realizing these aren’t current assets I’m looking at. The other thing I notice right away is that “goodwill” appears near the top of the page. After reading a lot of balance sheets your eye goes straight for current assets, intangible assets, cash, and debt so you can quickly check the net current assets, tangible book value, and enterprise value of the company. So a word like “goodwill” pops out at you.

If you’re like me, you’re just browsing the other lines at first. In the first 5 to 10 seconds, you’re all about the current assets, tangible book, and cash and debt situation.

Then, you go back and look for unusual things like cash listed under non-current assets, land, etc.

By the way, when reading a financial report in French or any other language, use Google Translate. You can use Google Translate directly in your Chrome browser when viewing web pages. Google will auto-translate for you.

But even when reading PDFs, you can copy and paste text into Google Translate.

For example, “Actifs financiers de gestion de trésorerie non courant” becomes “financial assets of non-current cash management” when you go to Google Translate and tell it to translate French to English. Actually, you don’t even have to do that. Google will auto-detect it’s French and translate into English by default.

I’m not saying Google Translate is a perfect translation tool. If you copy and paste a CEO’s letter to shareholders into Google Translate what you get back may not sound much like the man himself. But, it’ll get the basic content across. And for most investing work, you only need to translate one line at a time. The nuance of a written letter isn’t nearly as important as whether the debt you’re reading about is non-recourse or whether that’s a cash equivalent listed under non-current assets.

As for what I think about the company, that’s a good question.

The answer has almost nothing to do with the company being in France or its annual report being written in French. The big question mark here is the industry. A company that does a lot of public bridge and tunnel type work is a tricky thing to value. Evaluating companies that work for governments instead of other private companies is difficult. Especially when it comes to things like customer concentration, prices, and timely payment.

It can be harder to evaluate the balance sheet of a project oriented company too. So a government project oriented company is a bit of a double whammy.

But it’s far from impossible to understand a company like this.

There are public companies in the U.S. you can compare CIFE to. Possible comparisons include Sterling Construction (STRL) and Granite Construction (GVA). With a little digging, you could come up with a longer list of comparable companies in the U.S.

Then try to understand those companies. Try to get a handle on why they’re worth what they’re worth. What drives value in this business? What kind of multiples are we talking about. Are these businesses that trade at, below, or above tangible book value? What kind of returns on invested tangible capital do they earn? What do their balance sheets look like? How do they convert EBIT to net income to free cash flow? And how high do they trade in relation to 10-year averages of things like EBIT, net income, and free cash flow?

For American investors, that’s how I’d approach a French stock like CIFE. I’d start with a basic Ben Graham look at the balance sheet. What’s the price to tangible book? What’s the price to net current assets? Has EBIT and net income been positive or negative these last 2 or 3 years? Has operating cash flow and free cash flow been positive or negative these last 2 or 3 years?

Then, if you don’t understand the business real well – and I don’t understand construction at all – you look at some comparable companies in your home country.

Finally, if you’re still interested, I’d recommend opening up Microsoft Excel and entering the data you find on the company going as far back in the annual reports as you can. Try to calculate the “vital signs” I’ve talked about before. Or use other metrics you like a lot. What’s the Z-Score? What’s the F-Score? How does the company score on each component of Joel Greenblatt’s Magic Formula?

At that point, you should feel comfortable appraising the company. How much is the whole thing worth?

Don’t ask how much you personally would pay for a share of stock. Don’t think about your own feelings. Just look at comparable companies and the ways this company differs. If the companies you’re comparing this one to all tend to trade around 10 times EBIT, you should have real good reasons for saying this one shouldn’t too.

Whatever valuation measures seem right to you, use them (together) to come up with an appraised value range. Imagine this was a private company and you were testifying in some dispute over its value. You’re the expert witness. What’s your expert opinion?

Then compare your appraisal to the market price. If you said it’s worth $100 a share and it trades for $80 a share, move on. This stock’s not for you. There are better ones out there. If you said it’s worth $100 a share and the stock trades for $60 a share, you might want to investigate further. But only if you feel there’s something to this stock. If something really attracts you to it, then keep looking. Finally, if you appraise the company at $100 a share and the stock is selling for $40 a share, drop everything and make studying this stock your number one priority.

Basically, I’m just saying that the process for international value investing is a lot like the process for domestic value investing. You gather your sources. You try to make sense of them. You look for similar situations to compare the company to the same way you might look at the house next door when valuing your own house. And, finally, you make an honest appraisal of the business. What’s it worth?

If there’s a huge gap between your appraised value and the stock price, you look into it. If not, you don’t.

Usually, you don’t.

Based on what I’m seeing here, my first impression is that CIFE is an interesting stock. You should follow-up on it. You should definitely look at comparable companies – either in France, since you’re from there – or in the United States.

The things that jump out here are the record of profitability (if MSN Money is to be trusted). Sure, there’s growth there. But I don’t worry about that. I just look at the 10-year average EBIT. Even before adjusting the market cap to reflect the cash on the balance sheet, we’re looking at a company that’s trading at about 7 times EBIT. Anything below 8 times EBIT is immediately interesting. Warren Buffett tends to buy private companies for about 10 times EBIT and his investment usually work out well. Of course, the companies Warren Buffett buys are very, very high-quality. They’re wide-moat businesses that don’t require much capital.

Regardless, 10 times EBIT is normal. American companies often trade around 15 times normal after-tax earnings. And 10 times EBIT less 35% in corporate taxes leaves you with a 15 P/E, because 10 / (1.00 - 0.35) = 15.38.

So, yes, I’m very interested in CIFE.

But, no, I can’t say if it’s a value trap or not quite yet. I’d need to do more homework. I’ll go through the past financial reports and work up an Excel spreadsheet on the company. After that, the next step would be comparing CIFE to publicly traded companies in the same business both in France and the United States.

If you’re as interested in CIFE as Pierre is, I’d suggest you start work on those steps today.

Once I’ve taken a good look at CIFE, I’ll post my thoughts to the blog.

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Comments

I would just like to add that although I have not analyzed too many foreign stocks IFRS and GAAP standards sometimes make a big difference. Although the accounting standards seem to be 99% similar since there are so many accounting rules, that there are dozens if not hundreds of differences between the two. Just one example- IFRS allows the revaluation model for valuing long term assets but GAAP does not. There are many other differences that make it hard to compare two companies, when one is using GAAP and one is using IFRS. The best way to analyze these companies would be to reconcile the differences and then compare them. Just me two cents.

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